As Congress contemplates budget cuts to fund priorities such as tax reform and health care, policymakers should reconsider wasteful farm subsidy programs which duplicate privately available services and whose benefits typically are enjoyed by producers who typically earn more than non-farm families and who could otherwise afford such services.
Today, Sen. Jeff Flake (R- Ariz.), Sen. Jeanne Shaheen (D-N.H.) and Rep. John Duncan (R-Tenn.) will introduce a bill to terminate such program, the harvest price option feature offered under the heavily subsidized federal crop insurance program. Under standard yield insurance policies, producers insure a portion of their production based on price expectations at the time of planting. This coverage thus ensures protection in the event of a yield loss where qualifying losses will be indemnified at the agreed upon price. Under the harvest price option coverage, however, producer losses are indemnified at the higher of the price at planting or the price at harvest.
{mosads}Touted as “replacement cost” insurance, the harvest price option product is popular among producers and for good reason. The product receives the same rate of subsidy as the more basic yield policy which means producers receive higher payouts and higher subsidies when they elect the Cadillac coverage harvest price option affords. There are several reasons for policymakers to consider eliminating or restricting harvest price option coverage.
First, it is costly. The Congressional Budget Office estimates that elimination of the harvest price option would save $2.4 billion per year. The costs are especially high in years when droughts are accompanied by large price increases. For example, research shows that farmers received almost twice the level of indemnity payments during the 2012 drought than they would have received if only yield insurance had been available. It is no wonder that many refer to the farm safety net as a trampoline.
Second, harvest price option adds a price component that is readily available to producers through the futures and options markets. Oftentimes, farm program proponents argue that market failures justify government intervention, yet this is obviously not the case with harvest price option. Why should taxpayers pay for subsidized services that essentially compete with privately offered products?
Third, farmers already enjoy subsidized price and revenue protection through government price and income support programs that average almost $6 billion annually. While those programs are ripe for elimination in their own right, it makes no sense to allow producers to essentially double dip on price protection.
Lastly, high harvest time prices may encourage so-called moral hazard issues under the harvest price option. Producers may have fewer incentives to maximize their crop yields if the harvest price guarantee offered under harvest price option has appreciated significantly relative to the planting price guarantee, as it did in 2012, when corn prices at harvest were 32 percent higher than the planting time guarantee.
So it’s time to consider reforming the crop insurance program. According to Congressional Budget Office, the 10-year savings of eliminating harvest price option would be almost $25 billion. Farmers would still have a generous safety net that would provide protection in the event of yield losses. If they desire the Cadillac coverage, they would likely find it available on the private market. Indeed, such coverage was available as an “add on” product offered by private insurance companies before the government began offering harvest price option in the late 1990s.
A less ambitious option would be to continue to allow marketing of harvest price option products but cap premium subsidy levels at the level of equivalent coverage yield products. Here, if producers desired upside price protection, they would have to pay for it out of pocket, rather than having the taxpayer subsidize 60 percent of the costs. Savings would be less than full elimination but still at $13 billion to $15 billion over 10 years.
Joseph Glauber is a senior research fellow at the International Food Policy Research Institute and a visiting scholar at the American Enterprise Institute. He previously spent 30 years at the U.S. Department of Agriculture, where he served as chief economist from 2008 to 2014.